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What is a commercial mortgage?

A commercial mortgage is a type of loan provided by a lender to a borrower that is secured by a legal charge over commercial property.

Mortgages are attractive products which can be used to achieve a wide range of objectives such as contributing towards the purchase of commercial property, releasing equity to grow or invest in your business, refinancing to benefit from a lower interest rate or monthly repayments and consolidating existing debts into one manageable monthly payment.

 

What types of commercial mortgages are there?

There are three types of commercial mortgage:

  1. Owner-Occupied Commercial Mortgage
  2. Commercial Investment Property Mortgage
  3. Property Portfolio Loan

Owner-Occupied Commercial Mortgages are provided to businesses that trade from and own the property they wish to borrow money against.

Commercial Investment Property Mortgages are provided to property owners who are investors and receive a rental income from a third party tenant or licensee. In most scenarios the rental income the property generates is used to repay the debt over a period of time.

 

Property Portfolio Loans are provided to property professionals and investors. The lender will take some or all of the clients property investments as security (this may be residential, commercial or mixed use property, or a combination of all within the portfolio) and provide one loan, assessing serviceability by aggregating the total income from the portfolio to meet the proposed loan repayments.

 

When are commercial mortgages used?

Commercial mortgages are typically used to acquire or refinance both residential and commercial property and/or trading businesses. They are often the cheapest way to borrow because a lender takes tangible security against their loan in the form of a legal charge over the property/properties being offered as security. These loans typically start at £50,000 with different lenders have maximum facility limits ranging from £3m to £50m.

A commercial mortgage, also known as a business mortgage, serves as a medium to long-term loan, usually spanning three to 25 years. To secure a loan, most lenders require a minimum deposit of 25%. However, 100% finance is available subject to additional security being offered to the lender in lieu of a cash deposit and enhanced affordability checks.

Commercial mortgages can be used to benefit the business by funding:

  • Property purchases – Such as a commercial tenant buying their freehold or relocating your business to larger premises.
  • Purchasing existing trading business – Such as a trading hotel or care home.
  • Business expansion – Release equity in existing property to invest in other assets or businesses.
  • Property development – Structured development facilities for the construction of property/ies.
  • Property investments – When you will allow an unconnected 3rd party to take ownership of the property for an agreed period, for which you’ll receive a rent.
  • Business refurbishments – Property improvement or significant capital expenditure, such as extending a hotel to create additional bedroom stock.

Typical features of a commercial mortgage

Commercial mortgage criteria vary massively from lender to lender. Unlike residential mortgages that are usually fixed ‘off the shelf products’, commercial mortgages are tailor made solutions to help an SME or Property Investor achieve their goal/s.

The interest rate for a commercial mortgage is determined by a lenders perceived risk of the lend. Lenders will usually have a range, say 3%-5% above base rate, the higher the risk, the closer to 5% above base rate you will be. Other major factors considered by lenders are affordability – does the business generate sufficient income or profit from sustainable sources to repay the loan. And the LTV, as a percentage, what is the lenders exposure vs the value of the property/business they are taking as security. Longer term loans can also be perceived as higher risk, as confirming whether the income used to repay the loan is sustainable for the long term is difficult for lenders.

Once similarity commercial and residential mortgages have is that there are both variable rate loans and fixed rate loans. The offering however varies from lender to lender.

Commercial mortgages are viewed as higher risk compared to regular residential house mortgages, therefore higher interest rates are typically charged. However, commercial mortgages often offer better interest rates than traditional business loans, as the lender has the security of the commercial property in case of loan default.

Our experienced brokers can help you navigate this often complex market, click here to start your application or call us today.

 

What type of businesses can get a commercial mortgage?

Thanks to a wide range of lenders and a diverse debt finance market, all of the above facilities are available to sole traders, partnerships, large partnerships, limited companies, limited liability partnerships (LLPs), trusts, self-invested personal pensions( SIPPs) and SSASs (small self-administered schemes (SSASs)

There is a restricted appetite for off-shore companies, but options are available in the market.

 

What do I have to do to qualify? 

Each lender in the market has different criteria and appetite which are liable to change over time. SMEs and property professionals will therefore find it vital to have a specialist broker amongst their ranks to help navigate and display the options that are available at a given time. The six key areas lenders examine when assessing an application are:

  • Personal and business credit history
  • Experience and background of the borrowers and/or the key people involved in the business (such as the management team)
  • The type of property/business you wish to purchase or refinance
  • The proposed loan-to-value (LTV) 
  • Affordability: can the property/business afford to repay the borrowing it has requested?
  • Sustainability: is the income source to repay the loan sustainable for the full duration of the proposed loan(s) facility

Don’t worry if you can’t put a tick in all these boxes, as Finance Nations specialist brokers are on hand to work with you and support you in achieving your objectives.

 

What are the interest rates & other costs involved?

Interest rates and other deal costs vary from lender to lender. They typically start at c. 2% with the larger traditional banks, rising up to c.12% with niche lenders for high-risk transactions. Again, this is where a broker is important to navigate the market and present to you the most competitive solutions for your specific set of circumstances by approaching a wide range of lenders with your application.

Pricing is directly linked to a lender’s perceived risk in lending the money. The lower the risk of the deal going wrong or business failing, the lower the interest rate will be. The Finance Nation team is trained to work with customers to structure applications and present them to the market in the best light possible, therefore ensuring you benefit from the best terms lenders can offer.

When comparing commercial mortgages, you will need to factor in the associated costs, such as:

  • Arrangement fees
  • Valuation fees
  • Legal fees

The following fees may also be applicable:

  • Exit fees
  • Commitment fees
  • Monitoring fees


How long will it take to get a commercial mortgage? 

Arranging a commercial mortgage or a property portfolio loan, depending on the purpose of the loan, typically takes between two and six months. The more complex the deal, the longer it takes. For example, a straight refinance of an existing property to release equity can be achieved in six to eight weeks. By contrast, the acquisition of a going concern can take more than six months to complete because of the level of legal and financial due diligence that may be required.

 

What information or documentation do I need to apply?

 

Registering with Finance Nation will enable you to speak to one of Finance Nation’s specialist commercial finance team. Once we’ve confirmed that your requirements are realistic and achievable for lenders to fund, we will require the following information to start looking for deals: 

  • Confirmation/proof of the income that will be used to repay the debt, such as the last three years’ financial accounts for a trading business and/or lease agreements for property investment applications
  • Your latest management accounts (simply connect your accounting software to your account on Finance Nation and the integration will quickly find the information required)
  • Last six months’ personal and business bank account statements to review account activity (connect your bank account via the UK’s open banking platform to your account on Finance Nation and we’ll gather the information automatically)
  • Business plan and/or financial forecasts
  • CVs or background summary of the borrowers or management team
  • A&L (asset and liability) and I&E (income and expenditure) statements for all borrowers (20+ percent shareholders)


Other types of property finance explained

 

Corporate Buy to Let Mortgages: these are the same as normal buy to let mortgages, in that they are secured against residential property/ies. The only difference is that  the borrower and owner of the property is a UK registered Limited Company. Finance Nation’s team of experts can work with you to present the various options that are available in this market.

Development Finance: a Development Finance Facility or Property Development Loan is a facility that is specifically designed to help fund the construction of new build property, be it a single house, or a large scale development containing 50 or more units. They are usually drawn down in stages, at various milestones as the work to build the property progresses. Interest is usually capitalised (added to the loan balance), rather than serviced, with the sale or refinance of the property/ies on completion being the source of repayment for the loan facility.

Whatever your requirements, when it comes to commercial mortgages and property finance, Finance Nation’s team of specialists are on hand to guide you through the process and deliver the most competitive offer of finance the market has to offer you and your business.

 

What is the difference between a commercial mortgage and a bridging loan?

 

Commercial mortgages and bridging finance serve distinct roles within property financing. A commercial mortgage offers a long-term solution tailored for businesses or individuals seeking property for commercial use. It features lower interest rates and extended repayment periods, ideal for stable, enduring investments.

In contrast, bridging finance acts as a short-term funding option, addressing the immediate need to bridge the gap between property purchases or sales. It’s a swift, temporary fix, often with shorter repayment periods and higher interest rates than traditional commercial mortgages.

There’s a relationship between the two when individuals or businesses utilise bridging finance to secure a property quickly. This temporary solution facilitates the acquisition, until transitioning to a commercial mortgage for a more sustainable long-term financing solution, once the property is secured.

In essence, bridging finance serves as an interim measure, allowing access to a property swiftly before arranging longer-term financing, such as a commercial mortgage, for a stable and extended financial solution.

 

Why should I use a commercial mortgage broker to access a business mortgage or property finance? 



SMEs and property professionals are busy enough managing, growing and developing their business, without the added task of chasing banks and lenders trying to arrange finance too. A good broker doesn’t just arrange finance, they manage, control and coordinate the whole process from start to finish, freeing you up to focus on running your business.

Finance Nation’s team of specialists are professionals in their fields. We work with borrowers, using our knowledge, experience and skill to present deals to lenders in the best shape possible. This reduces a lender’s perceived risk, opens up more options and reduces the interest you’ll be charged for borrowing the money.

Covering the whole of the UK, Finance Nation’s extensive network and reach sees us working with over 150 lenders across a range of commercial finance products, loans and facilities. Navigating this market is often complex, time consuming and frustrating. We do all the hard work for you, using our vast experience and up to date knowledge of lenders’ appetite and criteria, which means we can get your application in front of the right lenders and underwriters as quickly as possible, saving you time and effort.

 

Is working with a commercial mortgage broker better than going direct?

As a successful commercial finance brokerage, we have access to lenders that the general public just don’t know about. There are lenders in the UK market who only deal with intermediaries, meaning the only way you can access them is through Finance Nation. In addition, we also benefit from exclusive offers from lenders which don’t exist for single customers approaching a lender.

The first step is to arrange a conversation with one of our team. Register with Finance Nation to get started.